IC-Q1: What activities are subject to the ban on incentive compensation?

IC-A1: Only two types of activities are subject to the incentive compensation ban: securing enrollment (recruitment) and securing financial aid. No other activities are subject to the ban.

When other activities are coupled with recruitment or securing financial aid, institutions must consider how they compensate persons or entities to avoid payments that are prohibited. Table 1 and the subsequent examples illustrate how these principles would be applied to activities that institutions carry out in support of recruitment and financial aid. Consistent with the clear statutory language, the Department considers payments to persons or entities that undertake or have responsibility for recruitment and decisions related to securing financial aid as subject to the incentive compensation ban even if their work also includes other activities.

Table One

Covered ActivitiesActivities that are ALWAYS subject to the ban on incentive compensation

Exempt ActivitiesActivities not subject to the ban on incentive compensation include the following, unless the activities of the employee or entity also involve a covered activity.

Marketing activities, including:
Broad information dissemination;
Advertising programs that disseminate information to groups of potential students;
Collecting contact information;
Screening pre-enrollment information to determine whether a prospective student meets the requirements that an institution has established for enrollment in an academic program;
Determining whether an enrollment application is materially complete, as long as the enrollment decision remains with the institution

Services related to securing financial aid, including:
Completing financial aid applications on behalf of prospective applicants (including activities which are authorized by the Department, such as the FAA Access tool, which can be used to enter, correct, verify, or analyze financial aid application data)

Student support services offered after the point at which financial aid is allowed to be disbursed for a payment period, including:
General student counseling;
Career counseling;
Financial aid counseling, including loan management;
Online course support - both professional services and computer hardware and software;
Academic support services, including tutoring, aimed at student retention, whether that support is provided prior to attendance in classes or after attendance has begun

Policy decisions made by senior executives and managers related to the manner in which recruitment, enrollment, or financial aid will be pursued or provided, such as, e.g., decisions to admit only high school graduates

Example 1-A:
Employee A at XYZ.com posts information about available programs and enrollment application procedures on a Web site for a local business school. Employee A also answers general questions about completing an enrollment application and forwards completed enrollment applications to the school. Employee A has no additional direct contact with these applicants. Payments to Employee A for these activities are not subject to the ban on incentive compensation because the employee is only engaged in exempt activities.

Example 1-B—Financial Aid Servicer:
A third-party servicer provides services related to securing financial aid. In addition to collecting financial aid information, the servicer uses that information to contact the financial aid applicant and helps him or her locate other publicly available information about programs and resources in completing the submission of information that could lead to the award of financial aid. Once the applicant has submitted the information, no further contact is made by the servicer. This level of activity is not subject to the ban on incentive compensation. (See 75 FR 66878 (Oct. 29, 2010).) However, if the servicer helps the student identify missing information on a financial aid application and then continues to counsel the applicant on receiving financial aid, the conduct of the servicer is now subject to the ban on incentive compensation as the conduct now encompasses covered activities.

Example 1-C:
Employee B tutors students after they have been admitted and become eligible to receive a disbursement of financial aid, but before they have actually received financial aid or started classes. None of the academic support services provided by Employee B is subject to the ban on incentive compensation.

Example 1-D:
Employee C encourages students to consider enrollment in an educational program before a purported enrollment deadline. Employee C’s compensation is subject to the ban on incentive compensation as it involves covered recruitment activities.

Example 1-E:
Employee D is involved in recruitment activities and is therefore subject to the ban on incentive compensation. Nonetheless, Employee A is eligible for a merit increase to his or her annual salary based on standard evaluative factors, as discussed in Question 4, that are independent of the number of students recruited, retained, or graduated.

[Guidance issued 3/17/2011]

IC-Q2: What types of payment are considered direct or indirect payments of incentive compensation?

IC-A2: The following table and subsequent examples provide examples of different types of payments relative to their characterization as incentive compensation.

TABLE 2

Types of payment that are direct or indirect payment of incentive compensation

Types of payment that are not direct or indirect payment of incentive compensation

“Tuition sharing” as a measure of compensation when based on a formula that relates the amount payable to the entity to the number of students enrolled as a result of the activity of the entity

Tuition as a source of revenue from which compensation is paid to an unrelated third party for a variety of bundled services (Example 2-B)

Profit sharing plans from which distributions are made to individuals based on the number of students enrolled by virtue of covered activities by the recipient (section 668.14(b)(22)(ii)(B))

Profit sharing plans, including 401(k) type plans, from which distributions are made to individuals on a basis that is neutral with respect to the role the recipient plays in student recruitment or the securing of financial aid

Salary adjustments that take the form of incentive payments based directly or indirectly on success in securing enrollments or financial aid

Employee benefits plans offered to all employees on a basis that is neutral with respect to the role the recipient plays in student recruitment or the securing of financial aid

Payments based on the application of an admissions policy

Cost of living adjustments (COLAs)

Bonus or other payments based on success in securing enrollments or financial aid

Compensation adjustments based upon seniority

Payments to faculty based upon student class size or academic achievement

Payments to senior executives with responsibility for the development of policies that affect recruitment, enrollment, or financial aid

Payments based upon securing student housing or other student services, including career counseling

Volume driven arrangements based on services that are not recruitment or securing of financial aid

Neither persons nor entities may receive direct or indirect payments of incentive compensation.
The Department received numerous questions about the use of "persons" rather than "persons or entities" in some parts of the preamble to the final rule. The Department will issue a technical correction to the regulations, consistent with this letter, which will clarify that in all places in the preamble related to incentive compensation, the Department was referencing the statutory prohibition that applies to both persons and entities.

"Tuition sharing:" The Department has been informed that some third parties charge institutions a percentage of tuition as a way of assuming the business risk associated with student recruitment. Further, such third parties have typically combined student recruitment services with other services not covered by the incentive compensation prohibition, such as advertising, marketing, counseling, and support services to admitted students, and verification of student aid application information.

Section 487(a)(20) of the HEA mandates that the "institution will not provide any commission, bonus, or other incentive payment based directly or indirectly on success in securing enrollments or financial aid to any persons or entities engaged in any student recruiting or admission activities or in making decisions regarding the award of student financial assistance." The Department generally views the payment based on the amount of tuition generated as an indirect payment of compensation based on success in recruitment and therefore a prohibited basis upon which to measure the value of the services provided. This is true regardless of the manner in which the entity compensates its employees.

However, as illustrated in the examples below, the Department does not consider payment based on the amount of tuition generated by an institution to violate the incentive compensation ban if that payment compensates an unaffiliated third party that provides a set of services that may include recruitment services. The independence of the third party (both as a corporate matter and as a decision maker) from the institution that provides the actual teaching and educational services is a significant safeguard against the abuses the Department has seen heretofore. When the institution determines the number of enrollments and hires an unaffiliated third party to provide bundled services that include recruitment, payment based on the amount of tuition generated does not incentivize the recruiting as it does when the recruiter is determining the enrollment numbers and there is essentially no limitation on enrollment.

With the statutory mandate in mind, the Department offers the following guidance with respect to certain possible business models:

Example 2-A:
A third-party servicer provides services that do not include student recruitment or the awarding of student financial aid, such as student counseling, verification of student aid application information, advertising, and collection of contact information about enrollment applicants. The ban on incentive compensation does not apply to the entity and does not apply to the employees of the entity because no services are offered that are subject to the ban.

Example 2-B:
A third party that is not affiliated with the institution it serves and is not affiliated with any other institution that provides educational services, provides bundled services to the institution including marketing, enrollment application assistance, recruitment services, course support for online delivery of courses, the provision of technology, placement services for internships, and student career counseling. The institution may pay the entity an amount based on tuition generated for the institution by the entity's activities for all bundled services that are offered and provided collectively, as long as the entity does not make prohibited compensation payments to its employees, and the institution does not pay the entity separately for student recruitment services provided by the entity.

Example 2-C:
The employees at Business A ensure that enrollment applications are complete and then forward the enrollment applications to the institution for admissions decisions. In addition, Business A employees receive financial aid files along with required verification documentation, complete the verification process, then return the files to the institution. In each instance, payments by Business A to compensate its own employees based on the number of files processed by those employees would be permitted because the employees do not undertake recruiting or admitting of students, or make decisions about and award title IV, HEA program funds.

In all of these examples, the institution receiving title IV funds remains responsible for the actions of any entity that performs functions and tasks on the institution's behalf. These responsibilities include ensuring that employees are not paid for services that would convert these payments into prohibited incentive compensation because of the activity the employees engage in. [Guidance issued 3/17/2011]

IC-Q3: Does the incentive compensation prohibition apply to all employees regardless of title or position?

IC-A3: Yes, the incentive compensation prohibition applies to all employees "with responsibility for recruitment or admission of students, or making decisions about awarding title IV, HEA program funds." (75 FR 66874 (Oct. 29, 2010).) As shown in Table 1, the Department makes a distinction between recruitment activities that involve working with individual students and policy-level determinations that affect recruitment, admission, or the awarding of title IV funds. The Department expects that employees who have titles such as enrollment counselors, recruitment specialists, recruiters, and enrollment managers have sufficiently direct involvement in recruitment that the incentive compensation ban applies to them. Senior managers and executive level employees who are only involved in the development of policy and do not engage in individual student contact or the other covered activities listed in Table 1 will not generally be subject to the incentive compensation ban.

Likewise, a college president or dean who speaks with prospective students about the value of a college education or the virtues of attending a particular institution would not violate the incentive compensation prohibition. (75 FR 66874 (Oct. 29, 2010).) [Guidance issued 3/17/2011]

IC-Q4: What "standard evaluative factors" other than seniority may an institution take into account in determining compensation of employees?

IC-A4: Institutions may use factors such as seniority or length of employment as a basis for compensating employees covered by the incentive compensation prohibition. Many other qualitative factors may also be used so long as they are not related to the employee’s success in securing student enrollments or the award of financial aid. These factors may include such things as job knowledge and professionalism, skills such as analytic ability, initiative in work improvement, clarity in communications, and use and understanding of technology, and traits such as accuracy, thoroughness, dependability, punctuality, adaptability, peer rankings, student evaluations, and interpersonal relations. (See also 75 FR 66877 (Oct. 29, 2010).) [Guidance issued 3/17/2011]

IC-Q5: Can institutions make payments to persons or entities engaged in any student recruitment or admission activity or in making decisions regarding the award of financial aid based upon the institution’s students’ academic performance while enrolled?

IC-A5: No. The compensation of recruiters based on the academic performance of the students recruited violates the incentive compensation ban. (See 75 FR 34817-34818 (June 18, 2010).) However, many activities are not considered recruitment activities subject to the ban on incentive compensation as shown in Table 1. To the extent that employees are engaged in these other activities their compensation may be based on successful student performance.

The preamble noted that bonuses for athletic personnel to reward performance other than securing enrollment or awarding financial aid, such as a successful athletic season, team academic performance, or other measures of a successful team, are permitted. (See 75 FR 66874-66875 (Oct. 29, 2010).) This statement merely reflects the fact that the payment of bonuses to athletic personnel is a common practice and is not typically viewed as incentive compensation based on recruitment of individuals as students, but at most may indirectly reward success in recruiting that small subset of individuals whose enrollment would benefit the institution’s athletic program. This discussion was not intended to suggest that incentive payments in other areas of the institution are allowed. [Guidance issued 3/17/2011]

IC-Q6: The preamble discusses the making of profit sharing payments and suggests that in certain circumstances they may be permitted. (See 75 FR 66878 Oct. 29, 2010.)
Can you provide further clarity regarding when profit sharing is allowed?

IC-A6: The final rule on profit sharing arrangements is at 34 C.F.R. § 668.14(b)(22)(ii)(B). In using the term "profit sharing," the Department intended to address plans that for-profit corporations use to compensate employees and officers of the corporation. The term “profits” here was not intended to address revenue generated at nonprofit corporations. This section was also intended to make clear that the Department does not view eligible retirement plans pursuant to section 402(c)(8)(B)(iii-vi) of the IRS Code as prohibited incentive compensation.

As stated in the response to Question 2, the sharing of profits with employees is permitted when they are shared in a way that is neutral relative to the type of work that an employee does. The rule prohibits using profit sharing as a bonus or commission for employees involved in recruitment or financial aid activities as described in the response to Question 1.

The Department has received requests for clarification regarding whether the profit sharing rule applies to payments to entities in addition to payments to individuals. The incentive compensation ban applies to payments to entities. However, section 668.14(b)(22)(ii)(B) was not intended to address payments to third parties as specifically addressed in Question 2. As illustrated in Table 2, nothing in the Department's regulations is intended to limit an institution’s ability to reward its employees with traditional profit sharing payments as long as such payments are not designed to benefit recruitment and financial aid personnel distinct from all other institutional employees. In that regard, section 668.14(b)(22)(ii)(B) was offered to provide assurance that profit sharing within the confines of traditional pensions plans is allowed as long as the payments are not a substitute for otherwise impermissible compensation to individuals engaged in recruitment or the provision of financial aid. [Guidance issued 3/17/2011]

IC-Q7: Do the incentive compensation rules apply to study abroad situations for Title IV eligible students?

IC-A7: Yes, the incentive compensation rules apply to a participating home school and a participating study abroad school. In addition, even if one of the two schools involved in providing a study abroad program (home school and study abroad school) is not participating, the participating school remains responsible for violations of incentive compensation rules, regardless of whether it is the non-participating school that performs the unlawful recruitment or securing of financial aid.

In addition, DCL GEN 11-05 states that "the Department does not consider payment based on the amount of tuition generated by an institution to violate the incentive compensation ban if that payment compensates an unaffiliated third party that provides a set of services that may include recruitment services." Importantly, the third party cannot pay its recruiters of students in a manner that is inconsistent with the HEA's prohibition against incentive compensation. Further, "The independence of the third party (both as a corporate matter and as a decision maker) from the institution that provides the actual teaching and educational services is a significant safeguard against the abuses the Department has seen heretofore. When the institution determines the number of enrollments and hires an unaffiliated third party to provide bundled services that include recruitment, payment based on the amount of tuition generated does not incentivize the recruiting as it does when the recruiter is determining the enrollment numbers and there is essentially no limitation on enrollment." [Guidance issued 11/17/2011]

IC-Q8: Where a non-profit or public institution has a wholly owned for-profit subsidiary that solely and exclusively provides bundled services to the parent institution and to no other institution are transactions between the institution and its subsidiary included within the scope of the ban on the payment of incentive compensation?

IC-A8: Yes. Incentive compensation includes "tuition sharing" as a measure of compensation when based on a formula that relates the amount payable to the entity to the number of students enrolled as a result of the activity of the entity. As noted in the answer to the immediately preceding question ((IC-Q-7), "the Department does not consider payment based on the amount of tuition generated by an institution to violate the incentive compensation ban if that payment compensates an unaffiliated third party that provides a set of (bundled) services that may include recruitment services." (emphasis added). A subsidiary is not an unaffiliated third party. See also IC-A-2. [Guidance issued 2/2/2012]